Janus Henderson Group plc Ordinary Shares

Good morning, my name is Emily and I'll be your conference facilitator today. Thank you for standing by and welcome to the Janice Henderson Group fourth quarter and full year 2022 results briefing. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. In the interest of time, questions will be limited to one initial and one follow up question. In today's conference call, certain matters discussed may constitute forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements due to a number of factors, including but not limited to those described in the forward-looking statements and risk factors section of the company's most recent Form 10-K and other more recent filings made with the SEC. Janice Henderson assumes no obligation to update any forward-looking statements made during the call. Thank you. Now it is my pleasure to introduce Ali Dabaj, Chief Executive Officer of Janus Henderson. Mr. Dabaj, you may begin your conference.

Welcome, everyone, and thank you for joining us today on Janus Henderson's fourth quarter and full year 2022 earnings call. I'm Ali Dabaj, and I'm joined by our CFO, Roger Thompson. On today's call, I'll start with some comments on the year. Roger will then go through the results, and after that, I'll provide a strategic update. Then we'll take your questions following those prepared remarks. Turning to slide two, 2022 provided one of the most challenging market backdrops in history. As you undoubtedly know, since 1928, 2022 is one of only four years where stocks and bonds had combined negative returns. U.S. Treasuries suffered their worst losses since 1788 and had back-to-back annual losses for the first time in over 60 years. This market backdrop translated into a difficult flow environment. For example, in the U.S., 2022 was the first time mutual funds and exchange-traded funds experienced combined net outflows. Janice Henderson certainly wasn't immune to the tough market conditions, which our results suggest. As I reflect upon the year, though, despite the industry headwinds, there were several tangible signs of progress at Janice Henderson. There was a tremendous amount of work done, and we have the foundation to achieve our ambitions over time on behalf of our clients, their clients, shareholders, employees, and all our stakeholders. Over the summer, we brought together people in the firm representing different backgrounds, parts of the business, and regions to create the Strategic Leadership Team, or SLT as we call it internally. This group is responsible for establishing the strategic direction of Janice Henderson, and members of the SLT will be leaders and partners in the implementation and execution of our strategy. We've also been successful elevating and adding to our talent across the organization in areas such as investments, distribution, operations, and ESG, including seeing exceptional former employees return to the firm. To highlight a few of the additions in distribution, we hired Michael Schweitzer, who has extensive leadership experience in the global asset management industry as our head of the North American client group. Michael will also be responsible for leading our strategic initiative in the U.S. intermediary space. In investments, we brought in an emerging markets debt team in September. Remember on our last quarterly earnings call, we said that we expected to have $500 million in EMD AUM by year end. I'm pleased to share as of today, we have now crossed the $1 billion in committed capital in less than six months, Mark. Zero to $1 billion in such a short period of time is a testament to what Janice Henderson can do with renewed energy, focus, and process. Additionally, we launched an EMD hard currency CCAB in December 2018, making the MD team even more accessible to a broader range of investors. There are many other examples on slide two that demonstrate we are not standing still when it comes to building top talent and creating opportunities for existing and new employees. Our board also experienced a significant refresh with six new members, including our chair. That means six of 11 or 55% of board members were appointed in 2022, bringing new energy and world-class and varied expertise. The new members provide backgrounds, inclined experience, strategic execution, ESG, and culture change. We are also proud of the gains we've made improving diversity on our board, as 45% of members are women and 30% are from racially and ethically diverse backgrounds. We spent a good deal of 2022 reviewing the business, seeking ways to drive efficiencies, and identified $40 to $45 million in savings so that we can use those savings to provide the fuel for growth to reinvest strategically in the business. We announced that last quarter and the execution is on track. Finally, we simplified our operating model, which included the sale of Intech in the first quarter of 2022. We also made great progress on upgrading our order management system, which we expect to go live during the first half of 2023. With that, I'll now turn the call over to Roger to run you through the details of our financial results.

Thank you, Ali, and thank you again to everyone for joining us on the call today. Starting on slide three, we'll look at our fourth quarter results. Volatility and global markets continue to impact our flows. However, investment performance, ending AUM, and revenue all improved over the third quarter. Our long-term investment performance remained solid, with 67% of our assets beating their respective benchmarks over three years. December ending assets under management were $287 billion, Up 5% from September due to better markets and US dollar depreciation against other currencies, which is partially offset by net outflows. Net outflows were $11 billion, which includes $7 billion of previously communicated institutional redemptions. Adjusted financial results are flat to the prior quarter. And finally, the board declared a $0.39 per share quarterly dividend. Turning to slide four on investment performance. Longer-term investment performance results versus benchmark improved compared to the prior quarter, with 67%, 70%, and 75% of assets beating their respective benchmarks over the three, five, and 10-year time periods. The one-year number is being impacted primarily by the fixed income and multi-asset capabilities. In multi-asset, the balance strategy, which is the vast majority of these assets, switched to underperforming the benchmark on a one-year basis. This is due to short-term underperformance during the first half of 2022, especially Q1. The balanced composite outperformed its benchmark during the second half of 2022, and as we sit here today, is back above its benchmark on a one-year basis. Absolute and relative fixed income performance was impacted by this historically tough year for bonds. The longer-term time periods remained very strong. For a few of our larger strategies, such as Core Plus and Absolute Return Income, the level of underperformance to benchmark was minimal. Shorter-term periods of underperformance will happen. Our investment teams remain professional, they stick to their knitting, and they're disciplined in their approach and process with a focus on delivering positive long-term outcomes for our clients, which you can see delivered in our long-term track records. Longer-term investment performance compared to peers continues to be competitively strong with at least 60% of AUM in the top two Morningstar quartiles over the 3, 5 and 10-year time periods. Slide 5 shows company flows. For the quarter, net outflows were $11 billion compared to $5.8 billion last quarter. This included the previously announced $7 billion of institutional redemptions and the impact of market uncertainty on the retail business for Janet Henderson and the industry as a whole. Turning to slide 6 for a breakdown of flows by client type. Net outflows for the intermediary channel were $3.4 billion, compared to $2.5 billion in the third quarter. The decline is attributed to higher net outflows in the US, whilst EMEA improved compared to the prior quarter. The US outflows were roughly in line with the industry. According to SimFund data, Janus Henderson's fourth quarter annualised growth rate for US mutual funds was minus 11.6%, compared to minus 11.1% for the industry as a whole, which speaks to the difficult flow environment that we saw last quarter. We did see some pockets of early wins, with our JAAA CLO ETF gathering $1.5 billion in flows in 2022, putting it in the top 2% of over 1,000 active ETFs. Additionally, global equity income and the overseas strategies accumulated significant inflows during the year. Institutional outflows were $6.6 billion, which were primarily driven by the EMEA region and include the two previously announced low-fee redemptions of $3 billion in the Sterling Buy and Maintain credit strategy and approximately $4 billion of equity AUM. Institutional flows were flat outside of these two large redemptions. We did have good gross sales this quarter from several mandate fundings. In fact, two of the last three quarters have been amongst the highest institutional gross sales results over the past five years. We are winning new business in institutional, and Ali will talk about our growth plans for institutional later in the presentation. Whilst last quarter I had to inform you about $7 billion of known losses, I have no new large redemptions to tell you about today. Finally, net outflows for the self-directed channel, which includes direct and supermarket investors, was $1 billion. Similar to the intermediary channel, gross sales have slowed as retail clients remain on the sidelines. Slide seven is flows in the quarter by capability. Equity net outflows for the fourth quarter was $7.5 billion compared to $4.1 billion in the third quarter. As I mentioned on the prior slide, the results include $4 billion from the previously announced institutional redemption. The remaining outflows were primarily driven by U.S. mid and smid cap growth strategies and U.S. concentrated growth. Pleasingly, U.S. mid and smid cap growth have both seen very strong performance in 2022. Fourth quarter net outflows for fixed income were $1.9 billion, reflecting the $3 billion sterling buy and maintain institutional redemption that I just mentioned. We're pleased that despite the challenging environment for bonds, our fixed income capability had positive flows elsewhere. Several strategies contributed to these positive flows, including Australian fixed income, US buy and maintain credit, multi-asset credit, and JAAA. And finally, emerging market debt, which Ali mentioned as one of our early wins in diversifying the business. Total net outflows for multi-asset were $1 billion, driven by the balance strategy within the retail channels. Whilst the net outflow is in part due to short-term performance, the medium and long-term performance remain very strong. And as I said, the one-year metric is now back above benchmark. Finally, net outflows in the alternatives capability were $600 million. Moving on to the financials. Slide 8 is the US GAAP Statement of Income. Before moving on to the adjusted financial results, I do want to call out a few items impacting the GAAP results in the fourth quarter. First, during the quarter, we recognised a $36 million non-cash, non-recurring impairment on certain intangible assets. And second, there was a $19 million in non-recurring charges related to the implementation of the fuel growth cost efficiencies that were part of the 30 to $35 million that we told you about last quarter. These two items represent the main difference between our US GAAP and adjusted financial results. Now turning to slide nine and to talk about those adjusted financial results. Adjusted revenue increased 3% compared to the prior quarter, primarily due to higher performance fees offset by lower average AUM. Net management fee margin for the fourth quarter was 50.7 basis points, which is higher compared to both the prior quarter and the same period a year ago and makes Janus Henderson stand out from its competitors. Fourth quarter performance fees of $14 million include $31 million of annual performance fees generated primarily from the biotech hedge fund and a UK small cap equity segregated mandate. Significant outperformance in the fourth quarter generated these annual fees. Partially offsetting this revenue was negative $17 million in US mutual fund fees. Continuing on to expenses. Adjusted operating expenses in the fourth quarter were $282 million, up 5% from the prior quarter. Adjusted employee compensation, which includes fixed and variable costs, was flat compared to the prior quarter as higher profit-based variable costs were offset by lower fixed compensation as fuel for growth cost efficiencies were running ahead of the investment in our new strategic initiatives. Adjusted LTI was up 17% compared to the prior quarter due to mark to market. In the appendix, we've provided the usual table on the expected future amortization of existing grants, along with an estimated range for the 2023 grants due to use in your models. The fourth quarter adjusted comp to revenue ratio was 46.4%, up slightly compared to the third quarter, primarily due to the mark to market on LTI. Adjusted non-comp operating expenses increased 7% compared to the prior quarter, primarily due to higher seasonal marketing and G&A expenses. Compared to the fourth quarter of last year, non-comp expenses decreased 12%. On a year-over-year basis, adjusted non-comp expenses declined 1% compared to our original guidance at the beginning of 2022 of a percentage growth in the low teens. The quarter and the year-over-year comparisons show our commitment to strong cost management. Adjusted operating income in the fourth quarter of $123 million was down 2% over the prior quarter. Fourth quarter adjusted operating margin was 34.4%. And finally, adjusted diluted EPS was 61 cents, flat to the third quarter. Skipping through slide 10 to slide 11 for an update on cost efficiencies and our outlook for 2023. Recall, from our last earnings call, our philosophy has always been to maintain strong financial discipline and invest in the business where it strategically makes sense, whilst looking to operate more efficiently to provide the fuel for growth. Last quarter, our executive committee reviewed the business and has line of sight of $40 to $45 million in gross run rate cost efficiencies, which will be equally split between compensation and non-compensation expenses. We're on track to deliver those saves. Our intent is to reinvest all of these savings back into the business to fuel growth. Regarding expectations for 2023. Ending AUM for 2022 was 13% lower than the average for the year. All things equal, you should therefore expect management fees will be lower by this amount in 2023. We anticipate a compensation ratio in the mid 40s range, which reflects lower revenue, the denominator in this calculation. For non-compensation, we expect to increase our marketing and advertising, where we have an opportunity to capitalise on good investment performance, especially in our US intermediary business, that we want to not only protect, but to grow. We also want to make investments supporting our other strategic initiatives. We anticipate non-compensation percentage expense growth will be in the mid to high single digits. Of course, as we reinvest for growth, we'll continue to be mindful of our discretionary cost base. In addition to this effort to capitalize on areas where we feel there is real opportunity, it's important to note that roughly 40% of the year-over-year increase in non-comp expense will be non-cash. This primarily relates to the order management system transformation project that is anticipated to go live in early 2023, at which point we will begin advertising previously capitalized costs of the project through our P&L. Finally, we expect the firm's statutory tax rate to be in the range of 24% to 26%. The increase from the previous range is related to the UK corporation tax rate increasing to 25% from 19% affected the 1st of April, 23. Moving to slide 12, and a look at our liquidity. Our balance sheet remains very strong during this period of earnings volatility. Cash and cash equivalents were $1.2 billion dollars, as at the 31st of December, which is roughly flat to the end of last year, as excess cash flow generation has been used to fund dividends and buy back shares. Given current market volatility and to maintain that balance sheet flexibility, we've been conservative and purposeful in our approach to capital management and elected not to buy back stock in the fourth quarter. We have a strong liquidity position and continue to balance the capital needs and the investment opportunities of the business with returning capital to shareholders. Finally, the Board has declared a 39 cent per share dividend to be paid on the 28th of February to shareholders of record as of the 13th of February. With that, I'd like to turn it back over to Ali to give an update on our strategic progress.